Chapter 6 Negotiaton.pptx

Chapter 6
Strategic lead-time
management

Strategic lead-time
management
‘Time is money’ is perhaps an over-worked cliché in common parlance, but in logistics management it
goes to the heart of the matter. Not only does time represent cost to the logistics manager but
extended lead times also imply a customer service penalty. As far as cost is concerned there is a
direct relationship between the length of the logistics pipeline and the inventory that is locked up in
it; every day that the product is in the pipeline it incurs an inventory holding cost. Secondly, long lead
times mean a slower response to customer requirements, and given the increased importance of
delivery speed in today’s internationally competitive environment, this combination of high costs and
lack of responsiveness provides a recipe for decline and decay.

Time-based competition
Customers in all markets, industrial or consumer, are increasingly time-sensitive.1 In other words they
value time, and this is reflected in their purchasing behavior. Thus, for example, in industrial markets
buyers tend to source from suppliers with the shortest lead times who can meet their quality
specification. In consumer markets customers make their choice from amongst the brands available
at the time; hence if the preferred brand is out of stock, it is quite likely that a substitute brand will be
purchased instead.
In the past it was often the case that price was paramount as an influence on the purchase decision.
Now, whilst price is still important, a major determinant of choice of supplier or brand is the ‘cost of
time’. The cost of time is simply the additional costs that a customer must bear whilst waiting for
delivery or whilst seeking out alternatives

There are many pressures leading to the growth of time-sensitive markets, but perhaps the most
significant are:
1. Shortening life cycles
2. Customers’ drive for reduced inventories
3. Volatile markets making reliance on forecasts dangerous

The product life
cycle
• The concept of the
product life cycle is well
established. It suggests that
for many products there is a
recognizable pattern of
sales from launch through
to final decline (see Figure
6.1).

Shortening life cycles
A feature of the last few decades has been the shortening of these life cycles. Take as an example the
case of the typewriter. The early mechanical typewriter had a life cycle of about 30 years – meaning
that an individual model would be little changed during that period. These mechanical typewriters
were replaced by the electro-mechanical typewriter, which had a life cycle of approximately ten
years. The electro-mechanical typewriter gave way to the electronic typewriter with a four-year life
cycle. Now personal computers have taken over with a life cycle of one year or less!
In situations like this the time available to develop new products, to launch them and to meet
marketplace demand is clearly greatly reduced. Hence the ability to ‘fast track’ product development,
manufacturing and logistics becomes a key element of competitive strategy.

Shorter life
cycles make
timing crucial
• Figure 6.2 shows the
effect of being late into the
market and slow to meet
demand.

Shortening life cycles
It is not just time-to-market that is important. Once a product is on the market the ability to respond
quickly to demand is equally important. Here the lead time to re-supply a market determines the
organization's ability to exploit demand during the life cycle. It is apparent that those companies that
can achieve reductions in the order-to-delivery cycle will have a strong advantage over their slower
competitors.

Customers’ drive for reduced inventories
One of the most pronounced phenomena of recent years has been the almost universal move by
companies to reduce their inventories. Whether the inventory is in the form of raw materials,
components, work-in-progress or finished products, the pressure has been to release the capital
locked up in stock and hence simultaneously to reduce the holding cost of that stock. The same
companies that have reduced their inventories in this way have also recognized the advantage that
they gain in terms of improved flexibility and responsiveness to their customers.
The knock-on effect of this development upstream to suppliers has been considerable. It is now
imperative that suppliers can provide a just-in-time delivery service. Timeliness of delivery – meaning
delivery of the complete order at the time required by the customer – becomes the number one
order-winning criterion.

Customers’ drive for reduced inventories
Many companies still think that the only way to service customers who require just-in-time deliveries
is for them, the supplier, to carry the inventory instead of the customer. Whilst the requirements of
such customers could always be met by the supplier carrying inventory close to the customer(s), this
is simply shifting the cost burden from one part of the supply chain to another – indeed the cost may
even be higher. Instead, what is needed is for the supplier to substitute responsiveness for inventory
whenever possible.
As we discussed in Chapter 5, responsiveness essentially is achieved through agility in the supply
chain. Not only can customers be serviced more rapidly but the degree of flexibility offered can be
greater and yet the cost should be less because the pipeline is shorter.

Breaking free of
the classic
service/cost trade-
off
• Figure 6.3 suggests that
agility can enable
companies to break free of
the classic trade-off
between service and cost.
Instead of having to choose
between either higher
service levels or lower costs
it is possible to have the
best of both worlds.

Volatile markets make reliance on forecasts dangerous
A continuing problem for most organizations is the inaccuracy of forecasts. It seems that no matter
how sophisticated the forecasting techniques employed, the volatility of markets ensures that the
forecast will be wrong! Whilst many forecasting errors are the result of inappropriate forecasting
methodology, the root cause of these problems is that forecast error increases as lead time increases.
The evidence from most markets is that demand volatility is tending to increase, often due to
competitive activity, sometimes due to unexpected responses to promotions or price changes and as
a result of intermediaries’ reordering policies. In situations such as these there are very few
forecasting methods that will be able to predict short-term changes in demand with any accuracy.
The conventional response to such a problem has been to increase the safety stock to provide
protection against such forecast errors. However, it is surely preferable to reduce lead times in order
to reduce forecast error and hence reduce the need for inventory.

Many businesses have invested heavily in automation in the factory with the aim of reducing
throughput times. In some cases, processes that used to take days to complete now only take hours
and activities that took hours now only take minutes. However, it is paradoxical that many of those
same businesses that have spent millions of pounds on automation to speed up the time it takes to
manufacture a product are then content to let it sit in a distribution centre or warehouse for weeks
waiting to be sold! The requirement is to look across the different stages in the supply chain to see
how time as a whole can be reduced through re-engineering the way the chain is structured.

One of the basic fallacies of management is that long lead times provide security and cover against
uncertainty. In fact, the reverse is true! Imagine a utopian situation where a company had reduced its
procurement, manufacturing and delivery lead time to zero. In other words, as soon as a customer
ordered an item – any item – that product was made and delivered instantaneously. In such a
situation there would be no need for a forecast and no need for inventory and at the same time a
greater variety could be offered to the customer.
Whilst clearly zero lead times are hardly likely to exist in the real world, the target for any
organization should be to reduce lead times, at every stage in the logistics pipeline, to as close to zero
as possible. In so many cases it is possible to find considerable opportunity for total lead-time
reduction, often through some very simple changes in procedure.

Lead-time concepts
From the customer’s viewpoint there is only one lead time: the elapsed time from order to delivery.
Clearly this is a crucial competitive variable as more and more markets become increasingly time
competitive. Nevertheless, it represents only a partial view of lead time. Just as important, from the
supplier’s perspective, is the time it takes to convert an order into cash and, indeed, the total time
that working capital is committed from when materials are first procured through to when the
customer’s payment is received.

Lead-time concepts
The order-to-delivery cycle
From a marketing point of view the time taken from receipt of a customer’s order through to delivery
(sometimes referred to as order cycle time (OCT)) is critical. In today’s just-in-time environment short
lead times are a major source of competitive advantage. Equally important, however, is the reliability
or consistency of that lead time. It can be argued that reliability of delivery is more important than
the length of the order cycle – at least up to a point – because the impact of a failure to deliver on
time is more severe than the need to order further in advance. However, because, as we have seen,
long lead times require longer-term forecasts, then the pressure from the customer will continue to
be for deliveries to be made in ever shorter time-frames.

The order cycle
• Figure 6.4 highlights the
major elements. Each of these
steps in the chain will consume
time. Because of bottlenecks,
inefficient processes and
fluctuations in the volume of
orders handled there will often
be considerable variation in
the time taken for these
activities to be completed. The
overall effect can lead to a
substantial reduction in the
reliability of delivery.

Total order cycle
with variability
• Figure 6.5 shows the
cumulative effect of
variations in an order cycle
which results in a range of
possible cycle times from 5
days to 25 days.

Lead-time
components
• In those situations where
orders are not met from stock
but may have to be
manufactured, assembled or
sourced from external vendors,
then clearly lead times will be
even further extended, with
the possibility of still greater
variations in total order to-
delivery time. Figure 6.6
highlights typical activities in
such extended lead times.

Lead-time concepts
The cash-to-cash cycle
As we have already observed, a basic concern of any organization is: how long does it take to convert
an order into cash? The issue is not just how long it takes to process orders, raise invoices and receive
payment, but also how long is the pipeline from the sourcing of raw material through to the finished
product because throughout the pipeline resources are being consumed and working capital needs to
be financed.
From the moment when decisions are taken on the sourcing and procurement of materials and
components, through the manufacturing and assembly process to final distribution, time is being
consumed. That time is represented by the number of days of inventory in the pipeline, whether as
raw materials, work-in-progress, goods in transit, or time taken to process orders, issue
replenishment orders, as well as time spent in manufacturing, time in queues or bottlenecks and so
on. The control of this total pipeline is the true scope of logistics lead-time management.

Strategic lead-
time
management
• Figure 6.7 illustrates the
way in which cumulative
lead time builds up from
procurement through to
payment.

Lead-time concepts
The cash-to-cash cycle
As we shall see later in this chapter, the longer the pipeline from source of materials to the final user
the less responsive to changes in demand the system will be. It is also the case that longer pipelines
obscure the ‘visibility’ of end demand so that it is difficult to link manufacturing and procurement
decisions to marketplace requirements. Thus, we find an inevitable build-up of inventory as a buffer
at each step along the supply chain. An approximate rule of thumb suggests that the amount of
safety stock in a pipeline varies with the square root of the pipeline length.
Overcoming these problems and ensuring timely response to volatile demand requires a new and
fundamentally different approach to the management of lead times.

Logistics pipeline management
The key to the successful control of logistics lead times is pipeline management. Pipeline
management is the process whereby manufacturing and procurement lead times are linked to the
needs of the marketplace. At the same time, pipeline management seeks to meet the competitive
challenge of increasing the speed of response to those market needs.
The goals of logistics pipeline management are:
• Lower costs
• Higher quality
• More flexibility
• Faster response times

The achievement of these goals is dependent upon managing the supply chain as an entity and
seeking to reduce the pipeline length and/or to speed up the flow through that pipeline. In examining
the efficiency of supply chains, it is often found that many of the activities that take place add more
cost than value. For example, moving a pallet into a warehouse, repositioning it, storing it and then
moving it out likely has added no value but has added considerably to the total cost.
Very simply, value-adding time is time spent doing something that creates a benefit for which the
customer is prepared to pay. Thus, we could classify manufacturing as a value-added activity as well
as the physical movement of the product and the means of creating the exchange. The adage ‘the
right product in the right place at the right time’ summarizes the idea of customer value-adding
activities. Thus, any activity that contributes to the achievement of that goal could be classified as
value adding.

On the other hand, non-value-adding time is time spent on an activity whose elimination would lead
to no reduction of benefit to the customer. Some non-value adding activities are necessary because
of the current design of our processes but they still represent a cost and should be minimized.
The difference between value-adding time and non-value-adding time is crucial to an understanding
of how logistics processes can be improved. Flowcharting supply chain processes is the first step
towards understanding the opportunities that exist for improvements in productivity through re-
engineering those processes.

Once processes have been flowcharted, the first step is to bring together the managers involved in
those processes to debate and agree exactly which elements of the process can truly be described as
value adding. Agreement may not easily be achieved as no one likes to admit that the activity they
are responsible for does not actually add any value for customers.
The next step is to do a rough-cut graph highlighting visually how much time is consumed in both
non-value-adding and value-adding activities.

Strategic lead-
time
management
• Figure 6.8 shows a generic
example of such a graph.

Value added
through time
• Figure 6.9 shows an actual
analysis for a
pharmaceutical product
where the total process
time was 40 weeks and yet
value was only being added
for 6.2 per cent of that time.

It will be noted from this example that most of the value is added early in the process and hence the
product is more expensive to hold as inventory. Furthermore, much of the flexibility is probably lost
as the product is configured and/or packaged in specific forms early in that process.

Variety through
time
• Figure 6.10 shows that
this product started as a
combination of three active
ingredients but very rapidly
became 25 stock keeping
units because it was
packaged in different sizes,
formats, etc., and was then
held in inventory for the rest
of the time in the company’s
pipeline.

An indicator of the efficiency of a supply chain is given by its throughput efficiency, which can be
measured as:
Throughput efficiency can be as low as 10 per cent, meaning that most time spent in a supply chain is
non-value-adding time.

Cost-added
versus value-
added time
• Figure 6.11 shows how
cost-adding activities can
easily outstrip value-adding
activities.

Reducing non-
value-adding time
improves service
and reduces cost
• Figure 6.12 graphically
shows the goal of strategic
lead-time management: to
compress the chain in terms of
time consumption so that cost-
added time is reduced.
Focusing on those parts of the
graph that are depicted
horizontally (i.e., representing
periods of time when no value
is being added), enables
opportunities for improvement
to be identified.

Pipeline management is concerned with removing the blockages and the fractures that occur in the
pipeline and which lead to inventory build-ups and lengthened response times. The sources of these
blockages and fractures are such things as extended set-up and change-over times, bottlenecks,
excessive inventory, sequential order processing and inadequate pipeline visibility.
To achieve improvement in the logistics process requires a focus upon the lead time, rather than the
individual components of that lead time. The interfaces between the components must be examined
in detail. These interfaces provide fertile ground for logistics process re-engineering.

Reducing logistics lead time
Because companies have typically not managed well the total flow of materials and information that link
the source of supply with the ultimate customer, what we find is that there is an incredibly rich opportunity
for improving the efficiency of that process.
In those companies that do not recognize the importance of managing the supply chain as an integrated
system it is usually the case that considerable periods of time are consumed at the interfaces between
adjacent stages in the total process and in inefficiently performed procedures.
Because no one department or individual manager has complete visibility of the total logistics process, it is
often the case that major opportunities for time reduction across the pipeline as a whole are not
recognized. One electronics company in Europe did not realize for many years that, although it had
reduced its throughput time in the factory from days down to hours, finished inventory was still sitting in
the warehouse for three weeks! The reason was that finished inventory was the responsibility of the
distribution function, which was outside the concern of production management.

To enable the identification of opportunities for reducing end-to-end pipeline time an essential starting
point is the construction of a supply chain map.
A supply chain map is essentially a time-based representation of the processes and activities that are
involved as the materials or products move through the chain. At the same time the map highlights the
time that is consumed when those materials or products are simply standing still, i.e. as inventory.
In these maps, it is usual to distinguish between ‘horizontal’ time and ‘vertical’ time. Horizontal time is
time spent in process. It could be in-transit time, manufacturing or assembly time, time spent in
production planning or processing, and so on. It may not necessarily be time when customer value is being
created but at least something is going on. The other type of time is vertical time, which is time when
nothing is happening and hence the material or product is standing still as inventory. No value is being
added during vertical time, only cost.

Supply chain
mapping – an
example
• The labels ‘horizontal’ and
‘vertical’ refer to the maps
themselves where the two
axes reflect process time
and time spent as static
inventory, respectively.
Figure 6.13 depicts such a
map for the manufacture
and distribution of men’s
underwear.

From this map horizontal time is 60 days. In other words, the various processes of gathering
materials, spinning, knitting, dyeing, finishing, sewing and so on take 60 days to complete from start
to finish. This is important because horizontal time determines the time that it would take for the
system to respond to an increase in demand. Hence, if there were to be a sustained increase in
demand, it would take that long to ‘ramp up’ output to the new level. Conversely, if there was a
downturn in demand then the critical measure is pipeline volume, i.e., the sum of both horizontal and
vertical time. In other words, it would take 175 days to ‘drain’ the system of inventory. So, in volatile
fashion markets, for instance, pipeline volume is a critical determinant of business risk.

Pipeline maps can also provide a useful internal benchmark. Because each day of process time
requires a day of inventory to ‘cover’ that day then, in an ideal world, the only inventory would be
that needed to cover during the process lead time. So, a 60-day total process time would result in 60
days’ inventory. However, in the case highlighted here there are 175 days of inventory in the pipeline.
Clearly, unless the individual processes are highly time variable or unless demand is very volatile,
there is more inventory than can be justified.

It must be remembered that in multi-product businesses each product will have a different end-to-
end pipeline time. Furthermore, where products comprise multiple components, packaging materials
or sub-assemblies, total pipeline time will be determined by the speed of the slowest moving item or
element in that product. Hence in procuring materials for and manufacturing a household aerosol air
freshener, it was found that the replenishment lead time for one of the fragrances used was such that
weeks were added to the total pipeline.
Mapping pipelines in this way provides a powerful basis for logistics re-engineering projects. Because
it makes the total process and its associated inventory transparent, the opportunities for reducing
non-value-adding time become apparent. In many cases much of the non-value-adding time in a
supply chain is there because it is self-inflicted through the ‘rules’ that are imposed or that have been
inherited. Such rules include economic batch quantities, economic order quantities, minimum order
sizes, fixed inventory review periods, production planning cycles and forecasting review periods.

The importance of strategic lead-time management is that it forces us to challenge every process and every
activity in the supply chain and to apply the acid test of ‘does this activity add value for a customer or
consumer or does it simply add cost?’
The basic principle to be noted is that every hour of time in the pipeline is directly reflected in the quantity
of inventory in the pipeline and thus the time it takes to respond to marketplace requirements.
A simple analogy is with an oil pipeline. Imagine a pipeline from a refinery to a port that is 500 kilometers
long. In normal conditions there will be 500 kilometers equivalent of oil in the pipeline. If there is a change
in requirement at the end of the pipeline (say, for a different grade of oil) then 500 kilometers of the
original grade has to be pumped through before the changed grade reaches the point of demand.
In the case of the logistics pipeline, it is the case that time is consumed not just in slow-moving processes
but also in unnecessary stock holding – whether it be raw materials, work-in-progress, waiting at a
bottleneck or finished inventory.

Bottleneck management
All the logistics processes can be viewed as a network of interlinked activities that can only be
optimized by focusing on total throughput time. Any attempt to manage by optimizing individual
elements or activities in the process will lead to a less-than-optimal result overall. A significant
contribution to the way we view logistics processes has been made by Goldratt,2 who developed the
theory of constraints more usually known as optimized production technology (OPT).
The essence of OPT is that all activities in a logistics chain can be categorized as either ‘bottlenecks’
or ‘non-bottlenecks’. A bottleneck is the slowest activity in a chain and whilst it may often be a
machine, it could also be a part of the information flow such as order processing. The throughput
time of the entire system is determined by bottleneck activities. It follows therefore that to speed up
total system throughput time it is important to focus on the bottlenecks, to add capacity where
possible and to reduce set-ups and set-up times if applicable.

Equally important, however, is the realization that non-bottlenecks should not be treated in the same way.
It is unnecessary to improve throughput at non-bottlenecks as this will only lead to the build-up of
unwanted inventory at the bottleneck. Consequently, the output of non-bottlenecks that feed bottlenecks
must be governed by the requirements of the bottlenecks they serve.
These ideas have profound implications for the re-engineering of logistics systems where the objective is to
improve throughput time overall, whilst simultaneously reducing total inventory in the system. The aim is
to manage the bottlenecks for throughput efficiency, which implies larger batch quantities and fewer set-
ups at those crucial points, whereas non-bottlenecks should minimize batch quantities even though more
set-ups will be involved. This has the effect of speeding up the flow of work-in-progress and these ‘transfer
batches’ merge into larger ‘process batches’ at the bottlenecks, enabling a faster flow through the
bottleneck. It follows that idle time at a non-bottleneck need not be a concern, indeed it should be
welcomed if the effect is to reduce the amount of work-in-progress waiting at a bottleneck

Emerging from the theory of constraints is the idea of ‘drum-buffer-rope’. The drum is beating the
pace at which the system as a whole should work. The buffer is placed before the bottleneck to
ensure that this limiting factor in the system is always working to its full capacity. The rope is drawn
from an analogy with a column of marching soldiers where the slowest man sets the pace. The rope
attaches the leader of the column to the slowest man – in a supply chain the rope is the means by
which replenishment quantities of materials, components, etc., are communicated to suppliers.

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